Environmental Scrutiny: Internal Audit Takes Stock of ESG Goals

# ESG

# Accounting and Disclosure

As ESG initiatives grow, audit teams work to ensure companies meet their publicized targets.

At recent NeuGroup meetings, internal audit heads discussed taking the first steps at integrating ESG into their audit plans, conducting tests to ensure alignment with public statements on environmental goals.

Though only a handful of members currently have ESG in their audit plan, others recognized the need and are kickstarting the process to get out ahead.

ESG goals “can become a sales pitch,” one member said, adding he is actively monitoring the goals, hoping to stave off the looming threat of ESG litigation .

A legal perspective. At a first-half meeting of NeuGroup for Internal Audit Executives , Heather Palmer, a partner who helps lead the global ESG practice at the law firm Sidley Austin , gave members advice on how companies can eliminate potential legal or reputational issues before they happen.

She said that the first way companies can protect themselves in terms of their public claims is to be careful and cautious about what goals are being advertised.

“One of the challenges to publicizing goals is you have to be careful about what goals you’re setting and how you’re vocalizing those goals,” she said. “Do you have a plan to back up how you plan to achieve those goals?”

Ms. Palmer said that lack of consistency in terms of public ESG goals and internal documentation has gotten several companies in trouble so far. “Externally, some are saying they can meet a certain goal, or they have these priorities, but within the company perhaps it’s a different story,” she said.

“A large part of avoiding litigation relates to ensuring consistency across the company and making sure the things that are material are getting disclosed in SEC filings.”

Auditing ESG targets. To ensure the company stays on track, one internal audit member recently completed the corporate’s first audit of its ESG and sustainability reporting process.

“For the first phase, we actually just completed a walk-through of the entire process, understanding where information is coming from and the overall governance of the process,” she said.

For the second phase of the audit, her team conducted more substantive testing focusing on areas in which the CEO had indicated goals during an investor conference.

“The audit started after the team had started pulling together information for the sustainability report, so the goal for next year is to conduct the audit a little earlier in the process so as to not interrupt their consolidation process,” she said. “We are also evaluating how we align this process to our reviews/audit of the proxy statements.”

Future-proof. Another member said she is working with the A4S Academy , a program that supports and trains finance professionals on ESG initiatives, which she said has been helpful in learning what approaches other companies are taking, especially around disclosures.

She is now working with her company’s technical accounting group to take “the next step” into future-proofing their disclosures.

The member said she is expecting an announcement from the SEC toward the end of the year mandating climate and human capital disclosures. “So we’ve already got something going for both of those,” she said. “We’re trying to start early in preparation for next year’s 10k.”